BlackRock TCP Capital Corp. 2022 Form 10-K Summary
Business context and reporting period
The filing is the annual report for the year ended December 31, 2022, filed February 28, 2023. BlackRock TCP Capital Corp. is an externally managed, non-diversified business development company and regulated investment company. It invests primarily in senior secured and other debt of middle-market companies, with a stated objective of generating current income and capital appreciation while emphasizing principal protection. The filing’s financial results are annual; it does not present a separate Q4 income statement.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Total investment income | $181.0 million | $165.1 million |
| Operating expenses | $92.6 million | $92.6 million |
| Net investment income | $88.4 million | $72.5 million |
| Net realized gain/(loss) | $(18.2) million | $4.3 million |
| Net change in unrealized appreciation/(depreciation) | $(79.4) million | $63.2 million |
| Net increase/(decrease) in net assets from operations | $(9.2) million | $133.8 million |
| Basic and diluted earnings/(loss) per share | $(0.16) | $2.32 |
| Net assets | $746.8 million | $829.5 million |
| NAV per share | $12.93 | $14.36 |
| Cash and cash equivalents | $82.4 million | $19.6 million |
| Debt, net of issuance costs | $944.0 million | $1.012 billion |
Net investment income margin on investment income was approximately 48.9% in 2022, compared with approximately 43.9% in 2021. Net investment income was $1.53 per share, versus $1.26 per share in 2021. The weighted-average effective yield was 12.7% on the debt portfolio and 11.9% on the total portfolio at year-end, compared with 9.2% and 8.7%, respectively, in 2021.
Cash provided by operating activities was $203.9 million. Cash used in financing activities was $141.1 million, including $140.0 million to repay the 2022 Convertible Notes and $70.5 million of cash dividends, partially offset by net credit-facility borrowings. The company invested $338.3 million and received $481.5 million from investment sales and repayments during 2022.
Portfolio, leverage and liquidity
- Investment portfolio fair value was $1.610 billion across 136 portfolio companies at December 31, 2022, compared with $1.841 billion across 115 companies in 2021.
- The portfolio was 88.2% debt investments and 11.8% equity investments; senior secured loans represented 83.9% of total investments.
- Approximately 93.6% of debt investments had floating rates, and 94.9% of floating-rate investments had interest-rate floors.
- Total debt outstanding was $949.1 million, with $286.1 million of additional capacity under the leverage program. The asset coverage ratio was 193%, above the statutory 150% minimum, and all debt covenants were satisfied at year-end.
- Debt maturities include $250.0 million of 2024 Notes, $100.0 million drawn under Funding Facility II maturing in 2025, $150.0 million of SBA debentures with maturities from 2024 through 2031, and $325.0 million of 2026 Notes. The Operating Facility matures in 2026.
- Level 3 investments represented approximately 94.0% of the portfolio, highlighting substantial valuation subjectivity and liquidity risk.
Material changes versus the prior comparable period
- Investment income increased 9.6%, primarily because higher LIBOR/SOFR rates increased interest income.
- Net investment income increased 21.9%, while operating expenses were essentially unchanged.
- Results shifted from a $133.8 million increase in net assets in 2021 to a $9.2 million decrease in 2022, driven by realized losses and significant unrealized depreciation.
- Net asset value per share declined 10.0%, from $14.36 to $12.93, while fair value of investments declined 12.6%. The portfolio grew in company count but became smaller on an aggregate fair-value basis.
- Net realized losses included losses from restructurings of Fishbowl and Avanti, partly offset by a gain on the exit of CORE Entertainment. Unrealized depreciation included losses on Autoalert and Edmentum and broad portfolio losses from widening market spreads.
- Annual declared distributions increased to $1.27 per share, including regular dividends of $0.30, $0.30, $0.30 and $0.32, plus a $0.05 special distribution, versus $1.20 per share in 2021. No portion of 2022 distributions was classified as a tax return of capital.
- Debt declined by approximately $70.3 million, principally because the $140.0 million 2022 Convertible Notes were repaid, partially offset by increased revolving borrowings.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or dividend guidance. Management expects to continue distributing substantially all taxable income but states that future distributions are not guaranteed and may vary with investment results, expenses, leverage and regulatory constraints. From January 1 through February 27, 2023, the company invested approximately $76.9 million, primarily in nine senior secured loans with a combined effective yield of approximately 11.9%. The board declared a first-quarter 2023 dividend of $0.32 per share.
- Higher base rates supported 2022 investment income, but they may increase borrowing costs and pressure portfolio-company cash flows, defaults and valuations.
- Market spread widening, recession risk, inflation, geopolitical developments, the Russia-Ukraine conflict and illiquidity could reduce NAV and increase credit losses.
- The portfolio is concentrated in sectors including internet software and services, diversified financial services, diversified consumer services and software.
- PIK interest, original issue discount and other non-cash income may require distributions before the related cash is received and could complicate RIC compliance and liquidity management.
- Substantially all portfolio assets secure the Operating Facility and Funding Facility II. A covenant breach or inability to refinance maturities could restrict investments, distributions and liquidity.
- The company is exposed to LIBOR discontinuation and transition to SOFR or other replacement rates.
- The Advisor receives management and incentive fees, and the filing describes conflicts involving allocation of opportunities, affiliated transactions, valuation and management time. Incentive compensation is not subject to clawback arrangements.
Most important facts for investors to verify
- Reconcile the decline in NAV and the $79.4 million unrealized depreciation with subsequent portfolio performance and realized recoveries.
- Review the credit quality, non-accrual status and valuation of the largest exposures, particularly Autoalert, Edmentum, Avanti, Fishbowl and other investments marked below cost.
- Confirm the filing’s non-accrual disclosures: one section refers to six debt investments, while the MD&A reports three portfolio companies representing 2.0% of fair value and 4.2% of cost.
- Assess refinancing and repayment capacity for the 2024 Notes, 2025 facility maturity, 2026 Notes and Operating Facility, including the effect of higher interest rates.
- Evaluate the sustainability of the $0.32 quarterly dividend against net investment income, taxable income, PIK income and future credit losses.
- Monitor the company’s high Level 3 exposure, valuation assumptions and the potential effect of further spread widening on NAV and asset coverage.
- Verify the required financial statements of 36th Street Capital Partners, LLC. The filing states that these audited statements were unavailable and that an amendment to the Form 10-K would be filed within 90 days.